Why Movies Cost So Much To Make

The movie business is a big business, garnering around $450 billion in 2007 globally. But even that huge number doesn't mean that all movies are money makers. Although there are thousands of movies made every year, only a percentage of those become feature films with the big budgets we often associate with the Hollywood movie-making business. And though the occasional independent, low-budget film will break out and become a runaway hit ("Napoleon Dynamite," "Super Size Me" and "Paranormal Activity" are all fairly recent examples), most blockbusters are on the high-budget end.

In 2007, for example, the average cost to produce a major studio movie was around $65 million. But the production costs don't cover distribution and marketing, which was another $35 million or so, on average, in 2007, bringing the total cost to produce and market a major movie right at $100 million. Those kind of numbers are a long way from the lowly $400,000 it cost to make "Napoleon Dynamite." (For related reading, see Movie Genres That Make The Most Money.)

Mega Movie BudgetsAnd $100 million is just an average. "The Lord of the Rings: The Return of the King" (2003) cost just over $100 million and made over $1 billion worldwide. Back in 1993, "Jurassic Park" was on the lower end of the average movie budget, costing $63 million; over 10 years later, in 2004, "Shrek 2" had a similar budget of over $70 million. Both "Jurassic Park" and "Shrek 2" grossed over $900 million worldwide. Then you've got the higher end of the movie budget spectrum: "Avatar" (2009) is a great example, with a mind-blowing budget of $237 million. The high investment paid off, though, with the movie grossing well over $2 billion.

Those are high-budget examples of movies that made enough to justify the expense, but not all movies do. Some costly flops include 2002's "The Adventures of Pluto Nash," which had a $100 million budget and managed to gross just a bit over $7 million. Then there was "How Do You Know?" in 2010, with a $120 million dollar price tag and a return of just under $50 million. Ouch.

Whether a movie makes or loses money, though, one question that seems to reappear often is just why it costs so much to make a movie. What magic potion must be acquired that brings the cost so high? (For related reading, see The Economics Of Summer Blockbuster Movies.)

The Costs of Making a MovieAccording to an article by The Guardian, movie costs can be broken down into some broad categories, including script and development (around 5% of the budget), licensing, and salaries of the big-name players, which usually includes the producer, the director and the big-name actors or actresses. Then there are the actual production costs, which include the ongoing salaries of all the people needed to make production happen; production costs eat up a big chunk of the budget, easily taking 25% of the total. And production isn't the end of the story: special effects, depending on the type of movie, can be an enormous cost, and music has to be composed and performed as well.

Then, when the whole movie is made and ready to go, it's time to start in on the work of marketing and distributing. After all that money invested, you can be sure that marketing is not an overlooked part of the process. There's no point in making a $100 or $200 million dollar movie if no one knows about it. "Spiderman 2," which had a production cost of $200 million, racked up another $75 million in expenses for marketing.

The fact that marketing expense is not included in production cost figures is why studios may claim to have lost movie on a money that grossed more than its negative, or production, cost. If a movie cost $100 million to produce, and grossed $130 million, then they've got a $30 million profit ... unless there was also a $50 million dollar outlay in marketing and distribution, in which case the profit turns to a $20 million negative on the balance sheet. (For related reading, see 6 Money Myths You Learned From The Movies.)

The Bottom LineEven with all those big numbers, and potential for huge losses, the movies keep coming. There must be some sense in it, though; despite the average cost of a movie ticket in the United States shooting up to almost $8 in 2010, we keep lining up to buy the tickets, eat the popcorn and watch those expensive movies. (For related reading, see Betting On The Entertainment Industry.)